The value of defined benefit buy-outs could soar to £300bn over the next 10 years, according to a new actuarial report.
The report, by Lane Clark & Peacock said that the buy-out market was entering a “new phase” – and that next year looked set to be a ‘bumper year’ for pension schemes and trustees transferring DB liabilities to the insurance sector.
At present it said that the volume of these full transfers from FTSE100 companies was less than £5bn.
This is a fraction of £800bn of legacy DB pension liabilities. But LCP predicts that this situation could change as many FTSE100 companies reduce pension deficits, making transfers more affordable.
LCP points out that over the past two years the average FTSE100 pension scheme has seen its buy-out funding position improve by 10 per cent, making a full transfer to an insurer increasingly attractive.
This improvement in affordability has largely been driven by falling life expectancies, good asset performance and strong price competition between insurers.
If current conditions persist, then LCP predicts a huge rise in FTSE100 companies who can afford to transfer their UK pension schemes to an insurer in full, with up to 40 companies likely to reach, or be close to fully funded on buy-out within a decade, equating to £300bn of pension scheme liabilities.
LCP partner Charlie Finch says: “In the short term, the insurance market is entering a pension scheme buy-out boom due to increased affordability and attractive pricing.
“For those individuals who have a final salary pension, they will be increasingly likely to find that it is no longer being provided by their former employer but by an insurer such as Legal & General or Pension Insurance Corporation who took on over £15bn of pension liabilities between them last year through buy-ins and buy-outs.
“As the demand for buy-ins and buy-outs grows, the key question is whether the market is approaching a tipping point where pension plan demand outstrips available insurance capacity.”
LCP found there were constraints that could impact insurer capacity, the most pressing being the availability of suitable investments to support current pricing levels.
Crucially from an operational standpoint, whilst volumes can grow, the number of transactions cannot increase significantly without insurers expanding their teams or further development in technology.
Finch adds: “To date insurer capacity and pricing levels have kept pace with increasing demand but, at the current rate of growth, demand looks set to outstrip capacity over the medium term putting upward pressure on pricing and squeezing less attractive schemes out of the market.
“What is clear is that 2019 is set to be another bumper year for companies and trustees getting on top of their pension plan risks and liabilities. Last year saw a record £24.2bn of pension liabilities transferred to insurers through buy-ins and buy-outs – nearly double the previous record of £13.2bn in 2014 – and we expect that 2019 could top £25bn for the first time.”